Telstra shares plummet

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Telstra shares plunged today after it issued a surprise profit
warning, casting a shadow over the government's plan to sell its
51.8 per cent stake in Australia's biggest telephone company.

Telstra stunned the market just after trading began by saying
earnings before interest and tax for the current year to June 2006
would be seven to 10 per cent down on the previous year because of
falling revenue from fixed-line services and intensifying
competition in the mobile phone market.

It also said government regulations - including new restrictions
the government wants to impose prior to Telstra's full
privatisation - would cost Telstra more than $A850 million in lost
revenue during the year.

The news drove Telstra shares down 22 cents or 4.8 per cent to
$A4.36 by 2pm AEST (0400 GMT), effectively slashing more than $A2
billion off the value of the government's stake in the company.

A month ago Telstra had warned that it expected its net profit
to decline in fiscal 2006 from the 4.45 billion dollars reported
for the previous year.

The latest warning came just as the government prepared to
introduce enabling legislation to parliament this week for the
Telstra sell-off, with a vote expected next week.

Prime Minister John Howard indicated last month that he hoped
the actual sale of the state's share in Telstra - then worth about
$A31 billion - would go ahead late next year.

But officials have said the sale would not go ahead unless
market conditions were right and that if the Telstra share price
fell too low, the government could shift its holdings into "future
funds" to finance state pension plans and upgrade
telecommunications networks in rural areas.

Telstra's new US chief executive, Sol Trujillo, has been in open
conflict with the government since taking over the company on July
1, complaining that existing restrictions and regulations planned
ahead of full privatisation were undermining its ability to
perform.

The privatisation has notably raised concerns about the level of
services Telstra will provide to remote and less populated parts of
rural Australia where the costs can be higher than in metropolitan
areas.

Trujillo has reassured the government that Telstra remains
committed to providing cost effective services to customers outside
the major metropolitan areas.

But he has also repeatedly criticised the level of regulation
applying to the company, suggesting that the regulatory framework
does not provide the best outcomes for the group's customers or
shareholders.

In its statement today, Telstra said "revenues lost to
regulatory decisions are large and growing each year"

"We"re looking in the (2005-06) year at more than $A850 million
in lost revenues and those as well have been factored into the
company's earnings outlook," Trujillo said.

"He's caused a lot of pain to a lot of 'mum and dad' (ordinary)
shareholders who bought shares," said Boswell, who represents the
National Party.

"He's devaluing them and I just cannot understand where he's
coming from."

Telstra said its latest guidance was based on a review of the
company's results for the first two months of the current fiscal
year and preliminary data from a strategic review of management and
operations ordered by Trujillo.